Investors eye opportunity and softer Brexit amid renewed uncertainty

Investors are rapidly identifying the opportunities which are emerging in commercial real estate markets, after another dramatic and unpredicted 24-hours in British politics renews political-driven market uncertainty.

A mix of short and medium-term advantages will now arise for investors and occupiers. In the short term, the UK’s new hung parliament is expected to put downward pressure on the pound, as volatility over the sustainability of the new government lingers, reinforcing the pre-existing ‘currency discount’ for overseas investors. So far today, sterling has fallen by 2% against the euro and the US dollar, which has driven the FTSE 100 up 1%, owing to the high concentration of oversees revenues by index constituents.

But the new window of opportunity also extends to occupiers. Tenants may look to seize on the renewed uncertainty to negotiate more favourable leasing terms with landlords. This window is likely to be brief and may best be gauged by the relative success by prime minister Theresa May in passing the imminent Queen’s Speech. The renewed instability “may serve as an unexpected catalyst to the investment market disconnect we had expected would be triggered by Brexit,” said Manish Chande, Senior Partner at Clearbell Capital. “Fundamentally tight supply in many markets will contain too much movement, but today’s results could prove an interesting shake down in some of our target markets.”

More profoundly, last night’s result will be interpreted as a vote against a ‘hard Brexit’ and re-opens the possibility for a much softer Brexit with access to the Single Market. Nigel Farage, the former-leader of the pro-Brexit UKIP party, this morning in response to the interview question “are you worried that your type Brexit will not be delivered?” replied “Very”. Last night in a television interview, Brexit secretary David Davis said that if the Conservatives lost their majority, they would similarly lose their mandate to withdraw the UK from European single market and customs union.

The Democratic Unionist Party (DUP), which has agreed to prop up the weakened Conservative Party, has mixed views on the EU. While opposed to outright membership, they are also against the idea of a ‘hard border’ between Northern and Southern Ireland, notes Knight Frank. “A ‘hard Brexit’ deal would certainly prompt a rebellion by pro-EU Conservative MPs, and some believe there are even hard line Brexiteer Tories who might vote against any deal with the EU. In short, even with DUP support, the Conservatives could need the support of other political parties to get the final Brexit deal through Parliament,” said Knight Frank’s Chief Economist, James Roberts.

“The prospect of a more balanced national consensus and the likelihood of a ‘softer’ Brexit may explain the moderate financial market response to the election result,” Walter Boettcher, Chief Economist at global real estate advisor, Colliers International. “The headlines may become uncomfortable over the next few weeks, especially as the EU Council meets on the 22nd of June and were hoping to have begun serious discussions. It is hard to see how this will progress in the absence of a clearer mandate.

“It was already hard to see how the negotiations would progress given the uncertainty posed by the need of another Greek bailout in the summer and a German election in September. It looks to me like greater Brexit clarity will remain elusive until the EU Council meets on October 19th, unless of course we find ourselves in the midst of another general election. In short, it is looking like business as usual in the UK, or at least a post EU Referendum version of normality.”

Without a Parliamentary majority, the new government will have to stick to relatively consensual economic and business policies and arguably less able to ignore the City of London. Knight Frank’s James Roberts adds: “Going forward, we would expect a return to middle-of-the-road economic policies, as these will be the easiest to push through Parliament. This will benefit both investment and occupier demand for commercial property, particularly in the office and industrial markets. A stronger defence of the London financial sector, should benefit the City and Canary Wharf office markets.”

For Scotland, the relative underperformance by the Scottish Nationalist Party (SNP) seems to remove the idea of a second independence referendum from the agenda, which should lift the cloud of uncertainty for the CRE market, returning domestic and international investor appetite to current nationwide norms.

“The direct property investment market will in our view see pricing remain stable. The slower transaction timescale for property, compared to equities or currencies, will allow time for the advantages of a hung Parliament to spread, and shape the market’s thinking. Currently, the IPD all property capital value index for commercial property has been rising for the last seven months, and is just 1.6% below pre-referendum levels. This shows that the impact of the referendum amounted to a short and shallow correction for property prices. The General Election is far less of an issue for commercial property than Brexit. Therefore, not only do we expect little or no impact on pricing, there should be upside further down the line via the realisation that Hard Brexit is receding as a likelihood and that the weaker pound has made the UK more attractive to overseas investors,” added Roberts.

“UK business, including the real estate industry, has become accustomed to uncertainty and managing through it – as evidenced by the many significant investment and occupier commitments since last June. Leadership, clarity and unity are the three things that business will be looking for now,” said Colin Wilson, Head of UK & Ireland, Cushman & Wakefield.